Here’s What Amazon.com Gave Up to Take On eBay Inc’s PayPal

It's amazing to think about how small and focused the company once was. It started out just being about books. But before long, Amazon.com (NASDAQ: AMZN) was expanding into other physical merchandise. Then came the Kindle, which opened the e-reader floodgates.

Next was the cloud service—an afterthought that's now responsible for up to 5% of the company's revenue and is growing at a 50% yearly clip. After that, of course, came movies. And most recently: a grocery delivery service.

The graveyard of industry stalwarts that have been reduced to shells of their former selves—or gone outright bankrupt—is long: Border's Books, any number of not-to-be-mentioned-here big box electronic stores, and the country's top two discount retailers.

Of course, grocers and delivery services (remember those drones?) could be next, but today, Amazon is squarely taking aim at PayPal—which accounted for 43% of eBay's (NASDAQ: EBAY) revenue last quarter.

An interface just like this could be coming to a screen near you--only it will be from Amazon. Source: PayPal .

According to a report from Reuters, starting today, Amazon will begin leveraging its 240 million active-member base to help it become an intermediary in third party payment systems. When customers purchase things on-line, have to pay their monthly bills, or want a recurring subscription to be charged to their credit card automatically, they can use Amazon—and the credit cards it has on-file for members—to do just that.

If that sounds a little confusing, think about how you can sign into many of your favorite sites via your social media account. It's just like that, except for payments.

To start with, Amazon is focusing on start-ups and other smaller companies. These players would likely jump at the chance to use Amazon—as it would lend an air of legitimacy to the business. The bigger question, however, is whether Amazon can convince some of the bigger e-commerce companies to favor its payment system over PayPal in the years to come.

CEO Jeff Bezos is famous for undercutting the competition; he once famously quipped: "Your margin is my opportunity." If Bezos offers a deal whereby third-party sellers pay less in fees for accepting Amazon payments than they do through PayPal, it would be a serious blow to PayPal. Even if eBay lowers fees to match Amazon, it would spell the end of high bottom-line growth for the service.

Though there are no details available right now to support this thesis, it would certainly be in keeping with how Amazon goes about doing its business.

The one thing Amazon had to forgoSurprisingly, however, Bezos appears to be ceding one key area to enter the third-party payments game. Many of the companies that could end up offering Amazon payment have been wary of allowing Amazon access to information regarding customer-purchasing habits. In the era of Big Data, that kind of information is gold. But Amazon is willing to give that information up, in order to be in merchants' good graces.

According to Amazon VP Tom Taylor, Amazon will only be collecting actual dollars and cents information for each transaction. Of course, this could eventually lead to some type of proprietary information, but the fact that Bezos was willing to forgo the collection of such data shows how important moving into payments is to the company.

No, PayPal isn't in trouble right now. It will take a while to see whether or not merchants warm up to the idea of using Amazon payments. But a decade down the road, it's entirely possible that we'll look back to June 9, 2014 as the beginning of the end for PayPal.

Your credit card may soon be completely worthlessThe plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.

Thousands of PayPal accounts may not be safe, many may have been compromised in the recent eBay hacking event as many people (unwisely) used the same password at PayPal as they did at eBay. Of course opening a second bank account and not keeping very much in the original bank account that you have associated with your PayPal account will also prevent hackers from getting very much if they do gain access to your account, (or for that matter, PayPal or eBay from yanking unwarranted refunds from that account). That's why it's so important to always transfer funds out of your PayPal account and the bank account associated with it AS QUICKLY AS POSSIBLE...

As uncle Carl has now lost over 146 MILLION DOLLARS on his eBay stock in less than two months, how much longer do we have to wait before Donahoe either follows David Marcus' lead or finds it necessary to either 'take a little gardening leave' or ' spend more time with his family'?

After the data breach the second quarter figures should make reading impressive enough to help him buy the fork, the spade and the wheelbarrow on eBay, assuming of course that using the fabulous Cassini he can actually find them!